Employee Compensation System. A guide to employee compensation strategic framework and administration.

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1 Employee Compensation System A guide to employee compensation strategic framework and administration. Approved by City Council August 6, 2013

2 Employee Compensation System A guide to employee compensation strategic framework and administration. System Purpose The purpose of this guide is to establish the compensation philosophy and ongoing compensation system administration. Background The previous employee compensation system was adopted in 2006 and was in place for seven years. This program was developed around three tenure based step pay plans and a desired market position of 103% of the weighted market average of market position actual salaries. As economic conditions evolve and change, compensation programs can become unsustainable. This requires periodic evaluation and may involve a comprehensive review. Over the last seven years, the nation experienced an economic downturn that changed the way many organizations address compensation. The City of Southlake was no different. Table of Contents System Purpose... Pg 1 Background... Pg 1 System Development... Pg 2 System Philosophy... Pg 2 System Administration... Pg 5 Summary... Pg 6 During this period, employee step increases were frozen and, in an effort to provide employees pay raises, the City chose to provide cost of living pay increases. However, this approach rendered the existing step based pay plan structure obsolete. It became evident that the plan in force no longer met the needs of the City. With the City s desire to be an employer of choice, a compensation consultant was retained to assess the relative market competitiveness and structure of the compensation plan. System Development The City of Southlake retained Evergreen Solutions in March, 2013 to conduct the compensation study. The study utilized best practice methodology to assess the relative position of the organization in comparison to its peer organizations. The study also 1

3 included an assessment of the procedures and practices that define how employees obtain salary adjustments over time. The consultant developed the compensation system by meeting with City leaders, reviewing the current environment and the City s strategy, conducting a market study, and developing a pay plan structure. A competitive compensation system allows the City to be an effective recruiter in the marketplace, contribute to a reduction in employee turnover, set the precedent to offer comparable base salaries for positions, and give employees ample room for upward growth and motivation for professional development. Each of these factors support the City s effort to be an employer of choice. System Philosophy 2 The City s compensation philosophy is to establish and administer an equitable program that provides for consistent treatment for all employees. The purpose of the City s compensation program is to support the City s desire to be an employer of choice by attracting and retaining a skilled workforce, rewarding high performers and motivating employees by offering pay opportunities commensurate with their position s internal and external value. The objective of the system is to support the City s strategic approach, provide for a financially sustainable model, and ensure a fair and predictable method of career progression and compensation for our employees. The compensation system philosophy includes the criteria listed below. Position Classification The Compensation System utilizes a point factor job evaluation methodology to determine the relative value of jobs based on job content. A point factor job evaluation system measures job classifications in terms of the degree to which several compensable factors are present in a given position. Compensable factors are measurable qualities, features, requirements or constructs that are common to many different kinds of jobs. Each factor has defined levels and the levels provide a measurement scale for rating each factor. This allows points to be assigned to each factor, creating a total numerical value in which positions can be ranked. This creates an orderly method for measuring each job relative to every other job and creates a hierarchy of positions. Compensable Factors Formal Education Experience Management & Supervision Human Collaboration Skills Freedom to Act Technical Skill Working Conditions Fiscal Responsibility The City has established a committee of department directors and key managers who are assigned to rank positions in order to determine their relative internal value to the City. This committee is known as the Job Evaluation Team. Positions are divided into exempt and non

4 exempt categories and, by using this method, each group has a set of weighted compensable factors which determine their placement on the pay plan. The market salary for the position is also surveyed and is a component of the evaluation. It is important to note that sworn public safety positions (police officers, firefighters, etc.) have an existing internal formal ranking structure. This structure is used to develop a hierarchy of positions for the public safety pay plan. Labor Market A labor market is the market in which workers compete for jobs and employers compete for workers. The City has designated eighteen cities as the labor market. Those cities include: Allen Arlington Bedford Carrollton Colleyville Coppell Euless Farmer s Branch Flower Mound Frisco Grapevine Hurst Keller McKinney North Richland Hills Plano Richardson University Park These eighteen cities represent a balance of organizations in size and geographic location. Market Position The City has chosen to strive towards a market position that is slightly above average at the 60 th percentile. By targeting the 60 th percentile, on average 40% of the labor market will pay higher than the City, while 60% of the market will pay lower. This strategy supports recruiting efforts as it leads to an increase to both the quantity and quality of candidates. It also has a positive impact on employee retention by positioning the City competitively among its peers. Pay Structure An organized pay structure provides employees a predictable method of career progression and sets future salary expectations. The City has established four open range pay plans: Non Exempt and Exempt: The non exempt and exempt pay plans have established pay grades that include a 50% spread between the minimum pay and maximum pay with a 5% progression between each pay grade. Public Safety: The public safety pay plan has established pay grades that include a 10% to 30% spread between the minimum pay and maximum pay with no overlap between pay grades. Executive: The executive pay plan has established pay grade that include a 50% spread between the minimum pay and maximum pay with a 13% progression between each grade. 3

5 Range Movement An important factor that defines a compensation system is how employees move through the range. With an open range system, the City is able to implement a hybrid approach that combines base pay increases with pay for performance. Additional flexibility exists with the ability to award pay adjustments as base pay increases, one time lump sum payments or a combination of the two. The percent increase and type of adjustment will be recommended as part of the proposed annual budget and is subject to change each year. For example, if City Council approves a 3% compensation adjustment, half could be allocated to base adjustment and half to pay for performance. In this scenario, an employee could receive a 1.5% base adjustment and a 1.5% merit increase. The 1.5% merit could be awarded as a 1.5% one time lump sum payment instead of a base pay increase. Employees hired during the year will receive the designated pay adjustment on a pro rated basis. Over time, the City can opt to phase out the hybrid approach and transition to a full pay for performance system. System Administration The Human Resources Director manages and administers the compensation system. The Director is responsible for recommending changes in the basic philosophy and objectives of the compensation policy; ensuring that job descriptions are current and accurate; ensuring that new positions are placed appropriately on the pay plan and that all positions are reviewed periodically; and conducting salary surveys to recommend structure adjustments. More detail about each of these functions can be found below. Job Descriptions A job description is a written document that describes the essential functions of a position, focusing on the general purpose and the principal duties and responsibilities of the position. Each position title in the City should have a written job description. The description is intended to describe the major functions of the position, not to provide a complete listing of all possible tasks and responsibilities. Job descriptions are reviewed on an as needed basis and each time a vacancy occurs to ensure the description accurately reflects the essential functions of the position. 4 Ongoing Job Evaluations Each position in the City was placed in a pay plan at a grade level and accompanying salary range utilizing the point factor evaluation methodology and market data. The Job Evaluation Team is responsible for evaluating new position requests for placement on the pay plan. In addition, the Job Evaluation Team will meet periodically to complete a comprehensive review all classifications to ensure proper placement on the pay plan and to maintain internal equity.

6 Market Survey Once every two to three years, Human Resources will conduct a market salary survey. Using the established labor market and benchmark positions, the survey assesses the City s relative position to the market. Data is collected directly from the labor market. Since the market is dynamic, it is important to maintain a competitive position once it is achieved. The City strives to maintain the 60 th percentile of the market. The 60 th percentile establishes a comparison point for benchmark positions and determines a percentage by which compensation may lag or lead the market. If it is determined that the City s pay structures lag the desired market position, a market adjustment may be recommended. If approved by City Council, the market adjustment is implemented by moving the entire structure by the recommended percentage and, if necessary, bringing employees to the new minimum. Pay Increases With the exception of market considerations, it is expected that employees will move through their pay ranges over time by receiving pay increases. Pay increases can be a combination of base pay adjustments and pay for performance adjustments. They can also be base increases, one time lump sum payments or a combination of the two. Recommendations to City Council During the normal budget process, the City Manager, Human Resources Director, and Chief Financial Officer will review the market and financial status of the City to make recommendations regarding structure adjustments and employee salary increases to City Council. The recommended compensation budget should be based upon the City s financial position and available funding. If funding is not available, pay increases should be frozen until such time that funding becomes available. As these recommendations reflect the compensation policy of the City, the final budget allocation rests with the City Council, and should be made in the context of the total financial outlook for the organization. New Hires Employees newly hired to the City will normally start at the minimum of the pay range of their position. Individuals that exceed the minimum qualifications of the position may be placed higher in the pay range commensurate with their experience and education level. Such placement should take into consideration internal equity and is subject to approval from Human Resources and the City Manager (or his or her designee). Promotions Employees who are promoted to a higher pay grade classification shall receive a minimum of a 5% pay increase or shall be placed at the minimum of the new pay grade, whichever is greater. Other Policy Considerations Employees should not be paid less than the minimum of the pay grade established for their position. Further, increases should not provide for employee salaries to exceed the 5

7 maximum of the pay range for their position. Employees at the maximum of their pay range may be eligible for lump sum payments that are not included in the base pay of the employee. Summary Funding a competitive pay plan is critical in attracting and retaining top talent. However, the plan must be internally equitable, externally competitive, fiscally responsible, easy to understand and administer, and aligned with the City s Strategic Management System. This compensation system incorporates each of these qualities by establishing a competitive market position, adopting flexible pay strategies, and incorporating pay for performance. Prepared and presented to City Council on August 6, 2013 by: Evergreen Solutions, LLC Brian Wolfe, Project Manager City of Southlake Stacey Black, Director of Human Resources Chad Minter, Human Resources Manager 6

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